Several of the key sustainable investment themes have been disaster zones in recent years, but improved technologies and government-led demand could spark a recovery in bombed-out areas like renewable energy.
Sub-sectors such as wind and solar, agribusiness, water and pollution control have been hit by a combination of weak economic growth and high costs. However, Impax Asset Management says away from the headlines, several significant drivers are combining to make the firm more bullish on the outlook for its funds than ever before.
‘It’s been a long time since the outlook for resource efficiency stocks and environmental markets has been quite as good as it is right now,’ said chief executive Ian Simm.
‘The next 12 months look promising across our investment strategies, buoyed by a broad-based cyclical recovery from the deepest downturn in living memory.
‘But there is much more at play than a cyclical pick-up. Away from the headlines, the last few years have seen the ratcheting of building regulations and energy efficiency standards and pollution limits continue to tighten.
‘And as the global economy recovers, companies exposed to these themes are seeing their earnings start to rise strongly as houses get built, cars roll off the production lines, and long-delayed infrastructure projects move forward.’
Moreover, Simm said the above-trend growth he anticipates in sub-sectors such as water treatment, pollution control and energy efficiency, is not dependent on costly government subsidies, but rather advances in technology and rapidly growing demand.
‘Even in renewable energy – the one sub-sector most assumed to rely upon government largesse and an elusive, international climate change agreement – the picture is finally starting to brighten,’ Simm said.
‘The policy uncertainty of recent years that has blighted renewables investment has fallen. Substantial consolidation has also improved equipment makers’ pricing power,’ he added.
‘But most of all, we see unsubsidised demand for renewables driving the sector’s long-term development, as the technologies involved simply get better and cheaper.’
Impax remains underweight, but Simm said he expects to increase his exposure throughout the year.
He is not alone in finding value in renewables. Knut Harald Nilsson, the Citywire A-rated co-manager of the £4.8 billion Skagen Kon Tiki fund, bought into solar energy for the first time late last year.
‘Solar energy stock prices are down more than 90% since 1997, if they have not gone bankrupt, and panel prices have come down 90% over the same period,’ Nilsson said.
‘We are starting to see the industry getting competitive, even in countries without subsidies. We have bought five companies we feel are the cost leaders, we are too big to get access through one company.’
The water scarcity theme is hardly a new one, but Pictet Water fund manager Hans Peter Portner believes there is now evidence emerging that the water theme is benefiting from being integral to the urbanisation, commercialisation and sustainability mega-trends.
He said in some cases water companies are actually benefiting from austerity, as more municipalities look to private sector expertise to reduce costs or provide financing.
‘Recent developments in the US highlight that trend, as Suez Environment just signed a 40-year partnership agreement for $195 million with the city of Bayonne, New Jersey, involving KKR, the private equity firm, in a new concession model separating asset management from operational activities,’ Portner said.
Although he expects global economic growth to be sluggish over the next couple of years, he believes the water industry ‘is poised to outperform the broader market as the thematic drivers remain valid regardless of the economic environment’.
Simm is also bullish on water, highlighting ‘improving technologies and increased demand’. China could potentially increase investment in this area, after the government vowed to invest in reducing pollution and water treatment at its Third Plenum.
The food scarcity theme is another longstanding staple of thematic investing that has disappointed in recent years, but while Simm noted the outlook for the broader agribusiness sector remains unclear, there are still opportunities to be found.
‘The fall in food prices bodes well for the margins at processing companies and medium-term the secular trend is compelling,’ Simm said.
Renzo Casarotto, head of global agribusiness at First State Investments, highlights seed technology as his favoured investment theme, which he says will be crucial to improving the yield from Chinese agriculture.
Although local farmers and officials see seeds as the primary factor driving future productivity gains, Casarotto said the lack of intellectual property rights and the difficulties in gaining distribution due to local firms receiving subsidies remain a challenge. That said, a number of companies have been able to gain traction in the country.
‘Pioneer seems to be one of the few international companies that has been able to penetrate the market and gain acceptance. Monsanto is in catch-up mode and its tie-up with Sinochem may prove to be a smart strategic move,’ he said.
‘Local and international seeds companies have ramped up trials with retailers and local bodies. The government seems very supportive of these initiatives.’